Beyond connectivity: Can telecom operators offer new services to business customers?

The quantitative findings presented in this report are based on an online survey conducted by the Economist Intelligence Unit (EIU) in November 2009. Ernst & Young commissioned the EIU to conduct the survey and write this report. A total of 365 senior procurement and IT executives from a broad range of industries participated in the survey, of whom 50% were C-suite or above. Roughly 33% were based in Europe, 36% in North and Latin America, 27% in the Asia-Pacific region and the remaining 4% coming from the Middle East and Africa. Participants also represented a wide cross-section of company sizes, with 58% having annual revenue of over US$5m, and 20% with revenue of over US$5b per year. In addition to the online survey, nine executives were interviewed on the record for this report. We would like to thank everyone who participated in the research for their valuable contributions.

Transcript of "Beyond connectivity: Can telecom operators offer new services to business customers?"

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About Ernst & Young’sGlobal TelecommunicationsCenterTelecommunications operators are facing thechallenges of growth, convergence, businesstransformation, technological change andregulatory pressures in increasingly difficulteconomic conditions. Operators chooseErnst & Young because they value ourindustry-based approach to addressing theirassurance, tax, transaction and advisoryneeds. They know that they have much togain from our clear understanding of theopportunities, complexities and commercialrealities of the telecommunications industry —wherever in the world they’re operating.What gives us this understanding is ourGlobal Telecommunications Center. Operatingfrom Paris, Cologne, Johannesburg, Riyadh,Delhi, Beijing, and San Antonio, the Centerbrings together people and ideas fromacross the world, to help our clients addressthe challenges of today — and tomorrow.Our clients benefit from our insights on keytrends and emerging issues. These may relateto the economic downturn, next-generationservices, infrastructure sharing, outsourcing,revenue assurance, operational efficiency,regulations, future growth markets ormergers and acquisitions. We help our clientsreact to trends in a way that improves thefinancial performance of their business.Learn more about our approaches andservices by visiting our website:www.ey.com/telecommunications

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About the The quantitative findings presented in this report are based on an online a wide cross-section of company sizes, with 58% having annualsurvey survey conducted by the Economist revenue of over US$5m, and 20% Intelligence Unit (EIU) in November with revenue of over US$5b per year. 2009. Ernst & Young commissioned In addition to the online survey, nine the EIU to conduct the survey and executives were interviewed on the write this report. A total of 365 record for this report. We would like senior procurement and IT executives to thank everyone who participated from a broad range of industries in the research for their valuable participated in the survey, of whom contributions. 50% were C-suite or above. Roughly 33% were based in Europe, 36% in North and Latin America, 27% in the Asia-Pacific region and the remaining 4% coming from the Middle East and Africa. Participants also represented The Economist Intelligence Unit interviewed a small number of executives in the course of their research. We wish to thank the following people for their valuable contribution: Wim de Bruyn Philip Parker COO and CIO Chair Professor of Standard Bank International Management Science INSEAD Walter Curd Kingsley Poultan CIO Head of Corporate Maxim Infrastructure Services Standard Bank International Dr Martin Elspermann Mike Russell COO of ASIC Group IS Director Allianz Managed Operations Atkins and Services SE Philip Hawker Keith Willetts Manager CEO and Chairman Communication Networks & TM Forum Infrastructure British Airways Written in cooperation with: Beyond connectivity

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5 Foreword Here at Ernst & Young‘s Global especially if they aim to position Telecommunications Center, we hear from themselves beyond the core network. telecommunications operators across the Im proud to see that our study offers our world about their challenges in delivering clients some clear indications for how services to business, or enterprise, they can improve their success in this customers. Many of our clients face area. enormous fundamental challenges right Our thanks to the Economist Intelligence now from intense competition across Unit for their research. And our thanks many areas of their business. This is no also to the executives who kindly agreed exception. to be quoted in our report. This report One of the main conclusions in our has depended on the generous time Power of the pipe study last year, was and insight of those who make major that there appeared to be a significant procurement decisions every day. Finally, revenue opportunity for operators in our thanks go to the 365 professionals Vincent de La Bachelerie addressing the needs of their enterprise who took time to respond to our survey. customers, but that there were very few examples of that being done successfully. We decided to seek first-hand evidence from the people that matter: the buyers. Vincent de La Bachelerie The conclusions perhaps wont surprise Global Telecommunications Leader, everyone. Many of our clients still have Ernst & Young some way to go to overcome scepticism about the services they can provide, vincent.de.la.bachelerie@fr.ey.com Beyond connectivity

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7 What do enterprises really think about their telecoms service providers? Getting accurate answers to this question is vitally important for telcos that wish to generate incremental revenue from enterprises, as well as attract and retain business customers. With a clearer understanding of their customers’ perceptions, telcos will be in a better position to shape more effective strategies for targeting enterprises. Beyond connectivity

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8Not all telcos are starting from the same point. Some have global network footprints,while others have only regional or national reach. Some telcos have both fixed-line andmobile operations, and others run either a fixed-line or a mobile network. Despite this Telcos are doing adiversity, a survey conducted by the Economist Intelligence Unit in November 2009 reasonably good jobrevealed large areas of agreement among respondents (representing large and smallercompanies, various industry sectors and based in different geographical regions) at providing coreabout what they see as telcos’ main strengths and weaknesses. The overall message connectivity services,is remarkably uniform: telcos are doing a reasonably good job at providing core but there is still muchconnectivity services, but there is still much scepticism that they can deliver “non-core”services. scepticism that they can deliver “non-core”But it’s not all doom and gloom for telcos looking to broaden their service portfolio services.beyond the so-called dumb pipe. Enterprises haven’t ruled out telcos playing a moreexpansive role, but, as this report argues, to move successfully into non-core serviceareas, telcos will have to emphasize more of their network strengths, explore furtherstrategic partnerships with IT vendors and heed warnings from enterprises about theirshortcomings. Beyond connectivity

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9 Here are the key findings from the report. • Telcos face a tough challenge convincing enterprise customers they can be trusted providers of additional services beyond voice and data. If telcos want to win customers over, they would be better served by showing a greater understanding of individual business requirements, and to tailor their service propositions accordingly, rather than to promote a wide range of services that enterprises don’t need or want. • Network expertise is the telco trump card. Enterprises hold their telcos in high regard for the delivery of real-time services over IP networks, such as video and audio conferencing. Telcos are therefore well placed to play a much more prominent role within the enterprise as demand increases for unified communications, the mobile internet and Voice over internet protocol (VoIP). • Telcos cannot assume, however, that providing a good basic connectivity service will automatically lead to greater enterprise enthusiasm for their additional services. There is no strong correlation between offering a reliable core service and the propensity of enterprises to take on additional services from their telecoms service provider. • Telcos can extend their capabilities through partnerships and acquisitions. By being more open to partnerships with IT providers and systems integrators, telcos can strengthen their position in the ICT market. Acquisitions, too, can lead to greater credibility in key areas where they lack capability. • Customers have a broadly positive view of the telco in areas of legacy expertise. Many enterprise customers are wholly satisified with the telecoms service they currently receive. Although connectivity services are subject to ongoing pricing pressure, mobile voice and data are increasing spending priorities for many organizations. • Smaller companies are more sceptical. The survey shows that smaller companies have more doubts than larger companies about telcos’ ability to deliver offerings in non-core areas, such as cloud computing, Software as a service (SaaS) and unified communications. Beyond connectivity

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11 Telcos face a challenge in convincing enterprises they can be trusted providers of additional services beyond network connectivity and a few closely-related network tasks. While many business customers appear happy to let their telecoms service providers manage network security and network installation, there are high levels of resistance to letting telcos do more, particularly if it involves handling their data assets. Beyond connectivity

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12First, the bad news Although telecoms spending by enterprises is holding up fairly well in the economic downturn, with 75% of survey respondentsNearly half of survey respondents say they would not consider saying their companies’ telecoms budget will either remainusing their telecoms service provider for data backup and the same or grow “somewhat” during the next two years,retrieval. Telcos’ data centers and managed hosting services are purse strings are not going to be loosened dramatically anyviewed with even less enthusiasm. Neither are telcos seen as time soon. Add in the fact that the survey respondents makenatural choices by enterprises for the relatively new and growing it abundantly clear that price and reliability are by far their topmarkets of SaaS and cloud computing. two considerations when weighing up the performance of theirWhich of the following services would you NOT consider current telecoms service provider, telcos can expect no let upobtaining from your telecoms service provider (as from business customers trying to get more value for their money (with the veiled threat they will go elsewhere for theiropposed to IT or other service providers)? core telecoms services if they are not satisfied on price). Customer call centers 62% What are the three most important criteria for IT help desk 51% evaluating the performance of your current telecoms service provider?Network installation and maintenance 37% Conferencing (web, video, audio) 29% Reliability of service 83% Business consulting 50% Price 78% Governance and compliance 50% Network security 32% Quality of support 30% Cloud computing 49% Geographical coverage 27% SaaS 44% Range of products 25% Data centers (managed hosting) 46% and services Domain and web hosting 33% Scalability 13% Data backup and retrieval 45% Privacy/security 10% credentials 0 10 20 30 40 50 60 70 Percentage Personalized/customized 9% offeringSource: EIU Transparency of billing 5%Enterprises have also warned telcos that they shouldn’t take Corporate social responsibility credentials (e.g., low 2%for granted that enterprises will continue using them for core carbon footprint)telecoms services. In fact, 66% of survey respondents say it Other 2%doesn’t make any difference from whom they buy telco services,as long as those companies, acting as resellers, can deliver 0 10 20 30 40 50 60 70 80 90 100comparable quality. Percentage Source: EIU Beyond connectivity

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13 Now the good news Despite some misgivings from customers, telcos have made progress in convincing enterprises that they are capable of delivering non-core services. For example, survey respondents appear to value telcos’ ability to deliver real-time IP-based services, such as video and audio conferencing. Which of the following services are you currently buying or would consider buying in the next 12 months from your telecoms service provider (as opposed to IT or other service providers)? 12% 15% Customer call centers 25% 13% IT help desk 36% 17% Network installation and maintenance 39% 26% Conferencing (web, video, audio) 18% 20% Business consulting 19% 20% Governance and compliance 40% 23% Network security 15% 23% Cloud computing 25% 21% SaaS 22% 21% Data centers (managed hosting) 41% 20% Domain and web hosting 29% 18% Currently buying Data backup and retrieval Would consider buying in 0 10 20 30 40 50 60 70 the next 12 months Percentage Source: EIU The high regard that enterprises have for telcos’ ability to provide real-time services might call into question the sincerity of survey respondents who claim it doesn’t make any difference to them where they buy telecoms services. After all, it would be easier to resolve network performance issues with the telco directly rather than with a reseller, and there isn’t much survey evidence of enterprise customers actually deserting their telecoms service providers (see Customer loyalty — looks can be deceiving, page 21). While enterprises are clearly warning telcos that they should not be complacent, their apparent open-mindedness towards resellers might partly be explained by a wish to keep telcos on their toes (and to lower their prices), particularly by those requiring service level assurances on network performance. The survey also gives encouragement to telcos wishing to play a more prominent role in “non-core” areas. Although half of respondents say they would not consider their telco for business consulting — a service far removed from their core expertise — more than 40% are either currently paying for business consulting from their telecoms service provider or would consider doing so. Progress of this sort shows it is not beyond telcos’ capability to reinvent themselves in the eyes of many enterprise customers. Beyond connectivity

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15 A surprise survey finding, perhaps, is that there is no strong correlation between offering a reliable core service and the propensity of enterprises to take on additional services from their telecoms service provider. The 36% of respondents who see no current drawbacks with their current service are on the whole no more willing to buy non-core services than the overall sample. Beyond connectivity

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16Moreover, the 17% of respondents who “agree strongly” that their telco has a clearmenu of services (assuming that clarity is related to the “core connectivity” serviceson offer) are also, on the whole, no more likely to buy (or consider buying) non-coreservices than those who don’t hold companies views on service menu clarity. A similarpicture emerges when comparing the service-buying intentions of those who agree thattelcos’ SLAs make it easy to evaluate performance with those that neither agree nordisagree on this matter.Working hard on getting the basics right for core services will only take telcos so far, itseems, in persuading enterprise customers to take on additional services. Customersatisfaction does not necessarily lead to successful upselling.Which of the following services are you currently buying or would youconsider buying in the next 12 months from your telecoms service provider(as opposed to IT or other service providers)? (Whole sample compared withthose who see no drawback with their current telecoms service.) 18 % Customer call centers 26% 37% IT help desk 39% 53 % Network installation and maintenance 53% 56 % Conferencing (web, video, audio) 65% 35 % Business consulting 38% 36 % Governance and compliance 38% 60 % Network security 63% 35 % Cloud computing 37% 43 % SaaS 45% 30 % Data centers (managed hosting) 42% 60 % Domain and web hosting 61% 48 % Data backup and retrieval 47% 0 10 20 30 40 50 60 70 Percentage No drawbacks to current telecoms service Whole sampleSource: EIUTelcos might take heart from the 36% of respondents who say they are perfectlyhappy with their telco service, but it isn’t necessarily a sign of complete success. Ifthe satisfied customers are typically buying only simple network connectivity at evercheaper prices, the result is not so impressive from the telcos’ perspective. Beyond connectivity

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17 What is the main drawback of your current telecoms service? High cost 21% Too much complexity 13% Insufﬁcient quality of service 11% International coverage for your organization 8% Inadequate security 3% Weak data privacy 3% Incompatible standards 1% Other 3% There are no drawbacks to my current telecoms service 36% 0 10 20 30 40 50 60 70 80 90 100 Source: EIU Percentage Note: Due to rounding, percentages do not add up to 100% Tread carefully, sales team Survey respondents have delivered a clear statement to telcos, with more than half agreeing that “telecoms service providers should stick to their core business instead of trying to be all things to all people.” Respondents could be recalling how telcos over-reached in the past with ambitious “one-stop shop” promises, or simply they are still not convinced that telecoms service providers are thinking through their non-core service propositions carefully enough. “Advanced services, such as SaaS and hosting, appear to be useful but are not always well thought out from telcos,” says Kingsley Poulton, Head of Corporate Infrastructure Services at Standard Bank International. “They can appear as another offering [by the telco] to provide an alternative income stream rather than a properly integrated service.” Thoughtless over-pitching can also damage telcos’ ability to retain customers for more basic services. “I’m much more interested in talking to someone who wants to sell me a reliable, cost-effective network than someone constantly looking over my shoulder to see if there’s a chance to host my data center,” says Phil Hawker, Manager of Communication Networks and Infrastructure at British Airways. Telcos should also think carefully about where to expend their service delivery efforts. One of the services most highly valued by enterprises, data backup and retrieval, is also one they are least willing to hand over to their telecoms service provider, so it might make sense to prioritize marketing efforts elsewhere. The survey suggests that SaaS and cloud computing could be more promising areas, for example, because customers see them as valuable and are more willing to hand over their management to telcos. Beyond connectivity

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18Comparing the services rated “valuable” or “highly valuable” byrespondents with willingness to buy the service from telcos (as opposed toIT or other service provider). 28% Customer call centers 26 % 44% IT help desk 39 % 58% Network installation and maintenance 53 % 48% Conferencing (web, video, audio) 65 % 31% Business consulting 38 % Governance and compliance 49% 38 % Network security 77% 63 % 26% Cloud computing 37 % 36% SaaS 45 % Data centers (managed hosting) 49% 42 % 58% Domain and web hosting 61 % Data backup and retrieval 72 % 47 % 0 10 20 30 40 50 60 70 80 Percentage Services rated “highly valuable” by respondents Currently buying or would consider buying in the next 12 months from a telecoSource: EIUThe survey revealed some industry differences. Financial services companies andenterprises in the IT and technology sector value business consulting far more thanmanufacturing companies. Manufacturing companies, on the other hand, are moreenthusiastic than financial services companies about buying SaaS from telecomsservice providers. Telcos that successfully sell non-core services will be sensitive tothese kinds of nuances. To deliver a more targeted sales proposition, telcos that havetraditionally focused on core services will most likely have to retrain sales teams andaccount managers — or perhaps even partner with outside consulting professionals — ifthey are to make a more sophisticated and successful play for the enterprise segment.Integrated operators are well placed, but they need to up their gameSurvey respondents are ambivalent about the importance of having one supplier forfixed and mobile services. Those who are enthusiastic about opting for one supplierare matched by just as many who do not see it as important. It might be that many“integrated” operators, which run both mobile and fixed networks, are finding itdifficult to coordinate their fixed and mobile businesses to the extent where they canoffer a compelling converged service. Beyond connectivity

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19 It is important to buy fixed and mobile services from the same telecoms service provider. Agree strongly 14% Agree slightly 25% Neither agree nor disagree 24% Slightly disagree 24% Strongly disagree 14% 0 5 10 15 20 25 30 Percentage Source: EIU The prize for the successful integrated operator, however, appears to be greater than for standalone operators with only a fixed or a mobile business to their name. Of those who agree on the importance of having one supplier for both fixed and mobile services, 62% see telecoms spend increasing over the next two years compared to only 48% overall who anticipate telecom spend to increase during that time. Conversely, of those that don’t agree that it is important to get fixed and mobile services from the same supplier, a sizable 25% anticipate telecom spend to decline in the next two years. One might have thought that a key driver for sourcing fixed and mobile services from the same supplier would be to reduce costs by taking advantage of discounted bundled packages, but the survey responses suggest this is an over-simplistic interpretation of enterprise thinking. It could be that those seeking a converged fixed and mobile service have higher expectations about what their telco can deliver and so are willing to spend more on additional services (and increase their telecoms budgets accordingly). On the other hand, those who prefer separate suppliers of fixed and mobile services have arguably much lower expectations of telecoms service providers’ capabilities and are more price-conscious. If this is the case, integrated operators are much better placed than standalone operators to drive incremental revenue from their enterprise customers. Beyond connectivity

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20Mike Russell, Group IS Director at Atkins, an engineering and design consultancy withover 200 offices around the world, argues that those with a fixed-line heritage havethe advantage. He believes that customers who want a single supplier are more likelyto choose a fixed-line operator that has added mobile, rather than the other wayaround. “Mobile service providers have yet to be convincing about their capacity tomanage fixed networks,” he says. “At the same time, fixed services vendors have a well-established service provisioning capability. Conservatism might lead people to hang onto what they know.”Show us you careEnterprises have long criticised telcos for their poor customer support, and thesurvey shows it remains a weakness. Customer call centers top the list of servicesthat enterprise customers would not consider handing over to their telecoms serviceprovider, followed by IT help desks (see bar chart, page 18). Enterprises may bethinking that if telcos can’t look after them as well as they would like, why trust themwith their own customers?“A good quality customer experience, where the provider really shows that they knowabout and care about the customer, is lacking across the [telecoms] sector pretty mucheverywhere,” adds Keith Willetts, CEO and Chairman of the TM Forum, a telecomsindustry association.Customer care problems appear to be more pronounced at smaller companies wheretelcos have typically not exerted much effort, perceiving higher-margin opportunitiesamong higher-spending multinational companies (see Smaller companies: an untappedmarket, page 26). But even among the higher-spending accounts, customer careproblems still persist.“Our experience with our fixed communications vendor is that while they arecompetent and professional, they do need regular management to keep them on trackand responding well,” says Russell. He also complains of long lead-in times promised bytelcos to provision core services, which need to be “arm-wrestled down.” “This can takea lot of project management effort,” adds Russell.In their pursuit of selling more advanced services, telcos would be well advised nottake their eye off basic customer care issues — and not just when it comes to dealingwith enterprises directly. “The major telcos have a unique problem in that many ofthe people making purchasing decisions for enterprise services and initiatives willhave direct experience of the telco’s consumer products in their personal life, and thatexperience may have been variable at best,” warns Hawker. Beyond connectivity

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21 Customer loyalty — looks can be deceiving Only 10% of the survey respondents say The most likely reason why enterprises they have changed telecoms providers say they are happy with their provider in the last year, with most opting to keep is because they have been successful with the same telco for at least two years, in squeezing out ever more favorable and probably much longer than that. 20% deals on a regular basis. A sign that of survey respondents say they don’t ever enterprises are keeping telco providers recall a change in their telecoms service on their toes is that over 33% of survey provider. What explains customers’ respondents say their companies put apparent willingness to stay with what their telecoms contracts up for tender they know? “on a needs basis,” while the majority of the remainder typically put their telecoms Given that 33% of survey respondents say contracts up for tender every two or there are no drawbacks to their current three years. Despite the high frequency telecoms service (and of this group, of contract tenders, however, there 30% have no memory of changing their appears no rush to switch providers, telecoms service providers) it might be which suggests that many enterprises are tempting to conclude that telcos and getting what they want when contracts enterprises are generally happy with each come up for renewal — cheaper, reliable other. This, however, would be misleading. core services — and electing to stay with One contributing factor to “customer them as a result. loyalty” could be the difficulty of changing Ovum, a telecoms research company, providers, but it isn’t the full explanation. provides further evidence. It projects a For most survey respondents (60%), 14.5% compound annual growth rate the difficulties that may be associated (CAGR) for the number of managed with switching providers are not seen IP/MPLS VPN connections between as big stumbling blocks to making a 2008 and 2014. Revenue from these move. Enterprises have also become connections, however, is expected to much sharper in their dealings with their grow at half that rate during the same telecoms service providers (as Russell time period. In the relationship between asserts) by inserting escape clauses the telecoms service provider and the into long-term contracts if they become enterprise customer, enterprises appear uncompetitive. to have the upper hand. Beyond connectivity

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24Wim de Bruyn, COO and CIO of Standard Bank International, is equally fulsome in hispraise of telcos’ network know-how. “Due to fast developments in technology, the levelof expertise for telecommunications market is critical,” he says. “With this in mind, The time for VoIP mayspecialized telecoms providers are still the preferred route.” have finally arrivedIn particular, most enterprises look to telecoms providers when it comes to the and many enterprisesdelivery of real-time IP-based services, such as video and audio conferencing. 66%of survey respondents say they are either currently buying or would consider buying appear to be embarkingconferencing services from their telecoms service providers. Large companies, with on a significant networkannual revenues in excess of US$5b, have even more enthusiasm. Sixty-six percent transformation.of this group already purchase voice and video conferencing services from theirtelcoms, with another 17% saying they would consider doing so. High take-up of telcos’conferencing services by multinational companies suggests that telecoms serviceproviders are capable of offering these services on a large scale, which would also setthem apart from most resellers.Incorporating real-time IP-based voice and video into SaaS or unified communicationspropositions — which IT suppliers or in-house IT departments might find difficult toimplement — may be one way, that telcos (along with IT partners) can bring innovativeservice propositions to the attention of enterprise customers and generate incrementalrevenue.VoIP is another area of opportunity. Although there are still pockets of resistance — 17%of respondents say they don’t use VoIP and have no plans to — nearly 33% of surveyrespondents say they will have replaced their traditional fixed-line service within twoyears, joining the existing 15% who have already made the change. The time for VoIPmay have finally arrived and many enterprises appear to be embarking on a significantnetwork transformation. Telcos should be well placed to help enterprises manage thistransformation if they want to be seen as the IP experts.Tougher economic conditions have also encouraged enterprises to invest more in virtualcollaboration tools. It’s a trend that should favor telcos as it plays to their strengths inthe delivery of real-time IP-based services.How has the downturn affected the take-up of the following services? 1% VoIP 11% 23% 38% 6% 20% Slightly reduced Uniﬁed communications (i.e., uniﬁed Signiﬁcantly reduced platform for voice, messaging, video, 5% 25% 39% 8% 3% 20% collaboration, etc.) Don’t use this service Signiﬁcantly increased Video conferencing 13% 25% 35% 4% 4% 19% Slightly increased The downturn hasn’t affected use 0 10 20 30 40 50 60 70 80 90 100 PercentageSource: EIUNote: Due to rounding, percentages do not add up to 100%Workforces are increasingly on the move, reflected in enterprises’ shifting spendingpriorities from fixed to mobile. Larger companies are putting more emphasis, inparticular, on the mobile internet, with 61% giving a higher priority to mobile internetspending (compared with 41% of smaller companies). It’s likely that many smallercompanies view the mobile internet as a luxury item, while larger companies can takeadvantage of economies of scale and clearer productivity benefits. Beyond connectivity

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25 The growing use of smartphones also means IT departments are facing much bigger network security and device management challenges, which creates other potential opportunities for telcos. Please indicate whether you expect to give the following services higher or lower spending priority in the next two years, compared to what you currently spend. 2% Fixed line 13% 53% 26% 3% 4% telephone 1% Mobile 9% 38% 39% 10% 4% telephone 1% A lot higher spending Fixed internet 5% 28% 52% 11% 3% priority compared to now access 0% Mobile internet Somewhat higher spending access 12% 33% 37% 12% 6% priority compared to now 1% Virtual private The same spending priority 7% 28% 41% 9% 14% networks (VPNs) 2% Somewhat lower spending Other private 13% 47% 13% 3% 23% priority compared to now networks 2% 1% A lot lower spending Other services 14% 45% 8% 30% priority compared to now Don’t know 0 10 20 30 40 50 60 70 80 90 100 Percentage Source: EIU The growing use of smartphones also means IT departments are The message from many enterprises seems to be that they facing much bigger network security and device management want their telecoms service providers to remain specialized and challenges, which creates other potential opportunities for focus on their historical expertise — the network. With those telcos. As trusted providers of network security — and in views in mind, telcos might be better served by partnering with partnership with device management software vendors — IT providers that can deliver the wider range of services that telcos could offer to either manage this increased complexity enterprises require. Partnership opportunities in SaaS, unified on enterprises’ behalf, or give enterprises the tools to do it communications and mobile device management look like themselves, perhaps on an SaaS basis. “I feel that in the future particularly promising areas. we can expect to see more control of the ‘outfield’ network Moreover, enterprises are increasingly allocating telecoms being offered to the enterprise by the operator and by the spend as part of their overall IT budget, which implies a closer device manufacturer to ensure devices, users and data are kept coordination between IT and telecoms procurement. Nearly safe from harm’s way,” says a senior executive for an ebilling 60% of survey respondents include the telecoms budget in specialist. their overall IT budget. The trend of combining budgets should Sharing the ICT proposition through partnerships provide a greater opportunity for telcos — and their partners — to sell packaged ICT services. Although broadening the service portfolio beyond basic network connectivity appears to be the aim of many telecoms service providers, the majority of enterprise customers don’t yet appear to see their telco in a more far-reaching role. Only 25% of survey respondents feel that is important that their telecoms service provider offers a broad range of product and services. Beyond connectivity

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26 Smaller companies — an untapped market Survey respondents from smaller companies show more scepticism than their largerTelcos have an counterparts toward accepting non-core services from telcos. Smaller companies (withadvantage, in that annual revenues below US$500m) also see less intrinsic value in non-core services than larger ones (annual revenues above US$5b). For example, more than 40% of surveythey already have a respondents from larger enterprises see value in cloud computing, as opposed to lessbilling relationship than 20% of survey respondents from smaller companies. Likewise, over 40% of surveywith many smaller respondents from larger companies see value in SaaS, but less than 30% of survey respondents have similar feelings among smaller enterprises.companies for basic Comparing larger companies ($5b+ annual revenue) with smaller companiesconnectivity services. (below $500m in annual revenue): To what extent do you value the following services? (Percentage of those answering 4 or 5 on a 5-point scale, where 5 is “highly valuable” and 1 is “not valuable at all.”) Customer call centers 32% 20% IT help desk 45% 37% Network installation and maintenance 58% 52% Conferencing (web, video, audio) 37% 64% Business consulting 44% 26% Governance and compliance 37% 53% Network security 76% 70% Cloud computing 43% 18% SaaS 42% 28% Data centers (managed hosting) 56% 41% Domain and web hosting 57% 57% Data backup and retrieval 76% 65% Larger ﬁrms 0 10 20 30 40 50 60 70 80 Smaller ﬁrms Percentage Source: EIU One might have thought that smaller companies would have seen more readily the cost and productivity benefits from SaaS and cloud computing. Perhaps a reason why many do not is because neither telcos nor software companies have managed to adequately sell the benefits, or have failed to make them attractive to companies with smaller budgets. Telcos have an advantage, however, in that they already have a billing relationship with many smaller companies for basic connectivity services, and there may be an opportunity to sell additional and generic services, courtesy of SaaS and cloud computing, as long as these services scale easily. These additional services could also be used to promote telcos’ core service proposition to smaller companies by bundling, say, a CRM SaaS product with broadband access. Mutually beneficial partnerships with IT vendors could be one way to achieve this. By partnering with telcos, for example, SaaS vendors would get a ready-made sales channel to many more (smaller) businesses that otherwise would be too expensive to reach directly; telcos would get the opportunity to broaden their service portfolio and increase revenue. Of course, this all sounds much easier than it is in practice. Executing on service delivery, where “cloud” services are synchronised with on-premise equipment, remains a significant challenge — both at smaller and large companies. Beyond connectivity

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27 The overwhelming good news for telcos is that enterprises highly value their network expertise. This makes it hard to imagine that telecoms service providers will be relegated by large swathes of enterprise customers to a sub-contractor network role (despite their threats to do so), especially if those customers require stringent SLAs on network performance. Beyond connectivity

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28ConclusionThe depth of telcos’ expertise on WAN optimization, managed IP/MPLS VPN servicesand application performance management also means telcos are in a strong positionto fend off incursions by non-traditional telecoms service providers into their coreterritory. They also have a solid basis from which to make a successful push on core-adjacent and non-core services.Yet telcos looking to make company strides beyond their core service propositionsare going to find it difficult. Enterprise customers are highly sceptical that telecomscompanies can deliver a wide range of services beyond the dumb pipe, but it doesn’tmean the sceptics can’t be won over. Telcos can make progress by integrating their non-core services more clearly into their product offering and by addressing the individualrequirements of their business customers.Network know-how is the telco’s trump card, but they must play it wisely. That meanspartnering with established IT vendors, which should enable them to move more swiftlyand more effectively into newer service areas, such as SaaS and cloud computing.Partnerships could also bolster telcos’ presence in other service areas, such as unifiedcommunications. Telcos can’t do everything, as the survey respondents make clear, butthey can leverage their network strengths to better advantage. Enterprises have sentout a clear warning to telcos that they must not repeat past mistakes of trying to be allthings to all people.Given that 72% of survey respondents say that telecoms spend over the last twoyears has either remained roughly equivalent or increased in relation to IT spend, itis not unreasonable to conclude that most enterprises recognize that maintaining ahigh-performance network, allied with software infrastructure investment, is vital toincreasing business productivity. This recognition should give telcos a head start ingaining a stronger foothold in the market for non-core and more IT-centric services.Even so, telcos can’t afford to be complacent. Beyond connectivity